Personal Solicitation Materials To Be Used By RehabCare Group, Inc.
and Its Representatives in Discussions With Selected Shareholders on the
Merits of the 2005 Equity Incentive Plan
Overview
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At RehabCare, attracting and retaining the best employees possible is a very
important key to our success. And, at the same time, we take corporate
governance very seriously as can be seen in our Institutional Shareholder
Services ("ISS") governance scores.
To those ends, we engaged ISS to advise us on best practices in creating an
equity-based compensation plan that would provide meaningful incentives to
our employees, be well within the bounds of good corporate practice and meet
their analytical screens. The result was the 2005 Equity Incentive Plan
("the Plan") that we have presented for your consideration and support in
the proxy for our 2005 Annual Meeting to be held on May 3, 2005.
Reason for Request
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The 2005 Equity Incentive Plan, if approved, is intended to replace the
current Second Amended and Restated 1996 Long-Term Performance Plan, which
terminates on April 23, 2006.
The Board of Directors believes the approval of the new plan is necessary to
maintain flexibility and uninterrupted availability of authorized shares for
our key employee and our non-employee directors' compensation programs.
Provisions of the Plan
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The company requests a new plan for 2,000,000 shares for future grants of
stock options and stock-based incentives to our key employees and directors.
Approximately 800,000 shares remaining from the old plan will be cancelled
upon approval of the new plan.
The company has moved from granting only time-vested stock options to
granting performance-vested awards based on growth in revenue and earnings
per share over a three-year period. If the goals are not achieved at the
conclusion of the period, no payment is made to the executive.
The maximum number of shares subject to stock options that may be awarded to
any individual shall not exceed 100,000 in any calendar year, except for the
chief executive officer for whom the annual maximum shall be 250,000. Dr.
Short was granted 250,000 shares in 2004 upon his appointment as CEO and
will not be eligible to receive any other grant for three years (until
2008).
The option exercise prices are required to be at least the full fair market
value at date of grant.
Currently, approximately 130 employees, officers and directors are eligible
to participate in the 2005 Equity Incentive Plan; approximately 19 currently
participate.
No more than 400,000 shares may be awarded as full value awards, that is,
restricted stock, performance awards, stock units, stock appreciation rights
or equity awards other than stock options.
Our Commentary on ISS' Analysis of Total Cost of Plan
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We assessed ISS' analysis of our Plan and have concluded that the primary
issues are a difference in the share authority we requested and the
computational items discussed in 2. and 3. below. We requested 2,000,000
shares and ISS' computation assuming inclusion of option transactions
between December 31 and March 7 shows 1,870,000 shares, a difference of
130,000 shares.
ISS computed the total cost of the Plan at 15.18%. We have re-computed the
analysis to consider all information available as of March 7, 2005 by making
the following changes:
1. The 200-day average stock price was updated to March 7, 2005 versus
the 200-day average as of December 1, 2004 used in the ISS
calculation. It is our view that, if March 7 is the measurement
date, all data should be as of that date.
2. The "C" shares (those that are subject to outstanding options) were
reduced by 108,200 shares to reflect stock options exercised during
the period from January 1, 2005 to March 7, 2005.
3. All "B" shares (those that are subject to full value awards) were
moved to the "C" category to reflect the fact that all options
granted during the period from January 1, 2005 to March 7, 2005
were at exercise prices equal to market value on the date of grant.
4. Adjusted "C" shares to consider forfeitures/cancellations of options
for the period from January 1, 2005 to March 7, 2005 to reflect
the actual number of options outstanding as of March 7, 2005.
Result
Making the changes noted above and using what we believe to be the ISS
methodology, our combined cost would be 13.12% compared to the ISS cap of
13.75%.
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REHABCARE ANALYSIS:
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200-day average (AS OF 3/7/2004) (1) $ 25.28 Shares outstanding @ 3/7/2005 16,658,534
Warrants and convertibles: -
Market Value $ 421,138,568 Share allocation from plans: 4,587,325
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Fully diluted shares: 21,245,859
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SHAREHOLDER VALUE TRANSFER
Share Average SVT (as %
Allocation Award Value SVT ($) of Mkt. Value)
---------- ----------- ------- --------------
A: 2,000,000 X $ 13.41 = $ 26,820,800 6.37%
B (2): - X $ 18.97 = $ - 0.00%
C (3): 2,587,325 X $ 10.27 = $ 26,571,828 6.31%
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Total: 4,587,325 $ 53,392,628 12.68%
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VOTING POWER DILUTION: Shares outstanding at 12/31/2004 16,550,334
Options exercised: 1/1/05 to 3/7/05 108,200
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Shares outstanding at 3/7/2005 16,658,534
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Voting Power
Share Dilution ----------------------------------------------------------------
Allocation (fully diluted basis) COST BASED ANALYSIS SUMMARY:
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Cost Weighting
A: 2,000,000 9.41% ---- ---------
B (2): - 0.00% Shareholder Value Transfer (SVT) 12.68% 95.00%
C (3): 2,587,325 12.18% Voting Power Dilution (VPD) 21.59% 5.00%
----------- ------ COMBINED COST 13.12%
Total: 4,587,325 21.59% COMPANY-SPECIFIC CAP 13.75%
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<FN>
(1) Updated 200-day average to March 7, 2005 from December 1, 2004 data
used in the ISS analysis
(2) Options granted during the period from 1/1/2005 to 3/7/2005 were all at
market price on the date of grant and, therefore, are included in
category "C" rather than category "B".
(3) Updated for grant, exercise and cancellation activity from 1/1/2005 to
3/7/2005. Represents options outstanding but not exercised at 3/7/2005.
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